Tale of a One (Trick) Unicorn

China’s aspirations to move up the global value chain have shifted the country’s focus to greater consumer spending and a service-oriented economy, built on indigenous technology and innovation.

That seems to make insurtech a godsend. It combines sleek financial services with a novel interface, a commitment to emerging technology and a global buzz. China’s insurance market accounts for $476 billion in premium and has expanded 17% annually the last five years. Although insurance penetration stands at only 3.6%, and mobile penetration is lower than in developed countries, global management consultant Oliver Wyman is upbeat: China’s insurtech premiums will add 31% annually to grow from their current $55 billion to $214 billion by 2021.

With a forecast like that, it’s worth taking a deeper dive into China’s insurtech movement. Let’s examine it through the prism of the local insurtech leader Zhong An.

With capitalization of $15 billion, much about this company broadcasts its unrivaled market position and innovation potential. Its establishment by the Chinese giants—Alibaba, Tencent and Ping An—was a coup in 2013. To understand the partnership’s magnitude, imagine Amazon, Google and Berkshire Hathaway joining forces to support an online insurance platform. That is exactly what happened in Zhong An’s case. As China’s leading social media company, Tencent provides access to the broadest audience of potential buyers; Alibaba has the largest e-commerce platform with an online payment system; and Ping An is China’s biggest insurer.

Zhong An leveraged the technology drive and exploited business alliances’ distribution channels through embedding products into partners’ online infrastructure. Its shareholders collected massive data on potential customers, setting the stage for Zhong An’s product development, precise marketing and a wide opportunity for cross-selling. The association with Alibaba’s e-commerce platforms was a powerful lead generator from the start, and Zhong An took over the niche market of merchants’ returned shipment risks.

Subsequently, the company recruited more than 180 partners responsible for trigger events, so the product line now transcends shipping policies to include more than 240 product terms. This broad spectrum of policies has its challenges, as they attract smaller volumes, thus making it expensive to scale. Although the nature of some products seems lighthearted, the business model potentially presents serious competition to Chinese brokers.

Is this a threat to brokers, or is it another cute insurtech unicorn going bust? Given the limited operational time frame, we can make only preliminary assessments, but there are some details worth noting.

For a startup in a highly speculative environment, its premiums jumped meteorically, to the point the company immediately started turning a profit. Currently, 492 million Zhong An customers pay in about $500 million in premiums. It has also been able to build some synergy with the brokerage sector, partnering successfully with the local affiliate of Hong Kong-based brokerage CM Houlder. The two connect, along with the insured, through WeChat, a social platform owned by Tencent. CM Houlder manager Gong Yi described this partnership as unprecedented: “The companies jointly launched mobile applications, which insured 280,000 customers in 25 days. We are currently working on new products with third-party providers, focusing on data analytics and premiums targeting various client groups.”

But as exciting as it was to see Zhong An expand, it was equally painful to witness profits tank 78% to $1.5 million last year. In the first quarter of this year, it bled $47 million.

With 80% of its employees in tech management, underwriting naturally went sideways. Zhong An finally faced the reality: its largest product line, merchants’ returned shipment insurance, has the largest loss ratio. While the company was able to cut claims losses, its premiums in the segment shrank 10% for the first time in 2016. Being tech savvy did not exempt executives from the fundamental laws of running an efficient business, and they have yet to tame the combined ratio and lower operating expenses.

A close look at Zhong An’s operation reveals a more disturbing picture: the top five partners are still responsible for 69% of premiums, while three of the five key products are distributed through Alibaba’s platforms. When premiums for returned shipments hit a snag, the company switched to selling health insurance on Tencent’s websites and ramped up travel insurance through another shareholder, Ctrip. Breaking into new distribution platforms is excruciatingly difficult, but the current acute dependency on select channels is also an existential threat.

Having recognized this hazard, the company tried to bring in new partners. Yet, product distribution remains a major pain point. Partners’ massive service charges and soaring costs of new business acquisition reached $164 million and accounted for 61% of operating expenses in 2016. All this was on top of fees paid to agents for distributing certain lines, exceeding Zhong An’s investments in much-hyped blockchain and artificial intelligence research. Outside partners are also free to terminate the relationship, change the terms of the agreement as applied to policies and fees, or launch competing online distribution platforms. All this puts Zhong An in an impossible bind and threatens the platform’s future growth.

Zhong An’s example is a textbook case of an insurtech startup struggling to engineer truly breakthrough solutions as opposed to just re-creating yet another platform for client interface. Think about your personal experience with rental cars or airline booking. Both have been bundling online sales with insurance long before Zhong An. The company mainly followed in their footsteps, maximizing profits through add-on product sales on shareholders’ websites.

In China, a company must have a compelling reason to partner, but when the product’s innovative value is questionable and the business model is easily replicable, your insurtech unicorn may fall prey to treacherous copycats.

Insurtech is always evolving. Those who don’t get it right at first will likely be back again. And as any respectable contender would, these startups impress on brokers the old-fashioned maxim of appreciating the drive for ingenuity and search for increasing clients’ value.

Gololobov is The Council’s international director. vladimir.gololobov@ciab.com